Auditor Independence Survey (ICAO)

Transcription

1 The Institute of Chartered Accountants of Ontario 69 Bloor Street East, Toronto, ON M4W 1B3 Tel: Fax: Toll Free: Introduction: Auditor Independence Survey (ICAO) The CICA and CPAB have jointly collaborated on an Enhancing Audit Quality initiative to focus on global proposals made in three interrelated areas in order to enhance audit quality. The three areas of focus are: auditor independence, the role of audit committees, and auditor reporting. Regarding the first area of focus, the Independence Working Group (IWG) has prepared a paper to evaluate proposals made by global bodies to enhance audit quality by modifying auditor independence rules in the context of the Canadian environment. Given that the focus of the global proposals has been on reporting issuers, the IWG has also limited its focus to Canadian reporting issuers. The IWG considered that in order for an effective audit to be achieved, the auditors needed to exercise professional skepticism; therefore, in reviewing global proposals, the IWG considered the potential impact of the proposals on auditor skepticism. Using this framework the IWG reviewed proposals in respect of: the appointment and rotation of auditors; the non-audit services that firms can provide their audit clients; whether there should be audit-only firms; and whether there should be a requirement for joint audits. Purpose of the Survey: Your views on the consensus reached by the IWG in each of these areas is important to help them engage in these global discussions. Please consider whether the proposal outlined is likely to enhance the exercise of auditor skepticism, resulting in enhanced auditor independence and audit quality. Some pros and cons of the proposals considered by the IWG in reaching their consensus are summarized below for your reference. Please complete the survey, which will take less than 10 minutes, by November 9, Mandatory audit firm rotation requires a new audit firm be appointed, usually after a specified period of time. The existing audit firm is not eligible for reappointment. Do you support mandatory audit firm rotation as the preferred alternative? Would prevent long tenures of audit firm appointments which would increase audit quality by: - Preventing audit teams from building unduly familiar relationships with management - Bring the fresh and objective perspective of a new firm - Successor audit firms would review work of incumbent audit firms - Reduce institutional familiarity threats Would result in losing the cumulative audit knowledge gained over the years at arbitrary intervals. Audit quality may suffer during early years of a new appointment as the auditor is still gaining sufficient knowledge of the company. Additional cost for the company because it would increase the amount of time management spends during the transition educating the new auditors.

2 - Reduce market concentration by encouraging the appointment of smaller audit firms Mandatory audit firm rotation exists in other jurisdictions - Brazil, China, India, Indonesia, Italy, Saudi Arabia, Turkey - Nine other smaller jurisdictions (Laos, Morocco, Oman, Paraguay, Portugal, Qatar, Serbia, Tunisia, and Uzbekistan). Reduces the accountability and responsibility of the audit committee to periodically assess the auditor s performance. Could cause hardship for the company if the time frame for changing auditors occurred at an inopportune time (ie. major transaction). Could be problematic for specialized industries where the number of audit firms with the requisite qualifications is limited. Most countries do not have mandatory audit rotation. There is no reliable evidence that audit quality has improved in those jurisdictions with mandatory audit firm rotation. Extensive safeguards already exist in Canada such as audit partner rotation, internal quality reviews, external inspections by CPAB and provincial institutes, second partner reviews, and oversight by audit committees. 2. If mandatory audit firm rotation were required, how many years would be considered a reasonable period before rotation to a new firm? - Up to 5 years (Turkey uses 5 years for listed companies) - Up to 6 years (as originally suggested in the EU proposal) - Up to 7 years (similar to Canadian audit partner rotation) - Up to 9 years (Italy uses 9 years for listed companies) - 10 years or more (use comment section to specify) - Other (please specify) 3. Mandatory audit tendering provides the potential appointment of a new audit firm but the existing audit firm is eligible for re-appointment. Do you support mandatory audit tendering as the preferred alternative? Motivate firms to enhance audit quality as reappointment cannot be presumed. Encourages audit committees to assess auditor Many of the cons for mandatory audit firm rotation also apply for mandatory tendering. The timing of tendering an audit is best left to the Page 2

3 performance in greater detail. Increased transparency around audit committee decisions on audit appointments. Reduces institutional familiarity threat. Increases competition in the audit market and open up opportunities for smaller and mid-tier firms to grow. judgement of the audit committee. An arbitrary time frame for a change could cause hardship for a company if it happens at an inopportune time (ie. major transaction). Tendering process may be focused on audit fees rather than audit quality. There may be an increased self-interest threat as auditors may not challenge management s assertions because of fear of losing the engagement. Adds time and cost for both management and the auditor. 4. Do you support a comply or explain regime whereby companies may either comply with rules or, if they do not comply, explain the reasons for non-compliance through public disclosure. Provides enhanced transparency on the auditor appointment process. Disclosure of disagreements between the auditor and the company may become less transparent. 5. Mandatory comprehensive review of the auditor s performance by the audit committee can improve audit quality. The existing firm will ordinarily retain the engagement unless the audit committee has determined that the audit firm has not met audit quality expectations. There would be disclosure of the justification for retention or replacement of the auditor and an explanation of the audit committee s process to reach this conclusion. Do you support mandatory comprehensive audit firm review as the preferred alternative? Puts an onus on the audit committee to review the auditor s performance (audit quality, independence, objectivity and professional skepticism). Improves transparency around auditor evaluation and reappointment process. Improves the interaction between the audit committee and auditors and encourages beneficial Information from audit regulators would be beneficial; however changes to legislation may be required to make this feasible. Need to consider appropriate legal protections for auditors making reports to prudential regulators and the nature of communications by the auditor, management and audit committee. Page 3

4 behavioural changes in the culture of the audit teams and firms. Audit committee would still have the accountability and responsibility of assessing the quality of the auditor and determining when a change is appropriate. The current practice of yearly assessment of the auditor is sufficient. This would increase the burden on audit committees. Appropriate criteria, tools and guidance will need to be developed to assist audit committees in carrying out these reviews and related disclosure requirements. 6. If mandatory comprehensive audit firm review were required, how often should this review be conducted? - Never- do not support - Once every 5 years - Once every 10 years (as required by the UK Financial Reporting Council) - Other (use comment section to specify) 7. Rank each of the three globally proposed alternatives to enhance auditor independence in order of preference (with 1 being your preferred preference and 3 your least preferred). - Mandatory audit firm rotation - Mandatory tendering - Mandatory comprehensive audit firm review - None of these alternatives are acceptable 8. Do you think that the current rules on independence, within the profession s rules of professional conduct, are appropriate and that no changes are required at this time? Do you have any other suggestions? If yes, please use comment section to explain. Proposals: Non-audit services 9. Further restrictions or prohibitions on the provision of non-audit services that an audit firm can offer their audit clients could reinforce independence. Do you support prohibiting audit firms from providing personal tax services for individuals in a financial reporting oversight role? (same for questions 11, 12 and 13) These changes would address the conflict of interest threats inherent in the current business model of auditors providing tax and advisory services to (same for questions 11, 12 and 13) There are safeguards to reduce threats to auditor independence such as pre-approval by the audit committee for non audit services and disclosure Page 4

5 companies they audit. Restrictions on non audit services may enhance investor perception of auditor independence, and their confidence and trust in audits. of fees for non audit services provided by the auditor in public filings. There are sufficient prohibitions on certain non audit services where those services are perceived to conflict with the auditor s role (such as bookkeeping, valuations, internal auditing, information systems design or implementation etc.) For smaller companies it is more efficient for the auditor to perform non audit services than it is to employ advisors with little knowledge of their company. The extent of non audit services provided by auditors today in Canada does not support further significant prohibitions on non audit services provided by auditors. 10. Do you support additional prohibitions on audit firms providing advice on aggressive and confidential tax transactions, similar to the SEC/PCAOB rules? 11. Do you support additional prohibitions similar to the SEC/PCAOB in respect of audit firms providing non-audit services on a contingency fee basis? 12. Do you believe further restrictions are necessary and, if yes, what further restrictions should be considered and why? Please use the comment box provided. Page 5

6 Proposal: Audit-only firms 13. An audit only concept would create audit firms that could provide only audit services not tax and advisory services. Do you support audit-only firms? Pro Removes the self interest threat that exists in the current multi-disciplinary model of the audit firms. By focusing on audit, this would eliminate the need to cultivate additional revenue from consulting or tax services. Audit only firms may be more inclined to invest in training and tools with a focus on increasing the skill sets of their auditors. Con The EC is the only body proposing audit only firms. EC proposals would operate by preventing audit firms, which have a high percentage of the market for audit services of larger reporting issuers from performing nonaudit services. This proposal appears to be a response to market concentration rather than improving audit quality. Multi-disciplinary firms have a better ability to attract and retain talent as these firms offer breadth of experience and growth opportunities. In house specialist skill sets, which may be more available in multi-disciplinary firms, enhance the audit. The extent of non audit services provided by auditors today in Canada does not support further significant prohibitions on non audit services provided by auditors. There are safeguards to reduce threats to auditor independence such as pre-approval by the audit committee for non audit services and disclosure of fees for non audit services provided by the auditor in public filings. 14. Would audit-only firms improve audit quality sufficiently to outweigh any potential disadvantages? Please use comment section to explain. Page 6

7 Proposal: Joint audits 15. Joint audits involve two audit firms working together to coordinate their audit effort. Do you support joint audits? Joint audits would help mitigate the systemic risk of the potential collapse of one of the large global audit firms. Joint audits would diversify the market to allow midtier, non-global audit firms to become active players in the large company market segment. Joint audits improve audit quality by having another set of eyes to review the work and to apply skepticism. No other body has proposed joint audits. The EC, which originally proposed joint audits, has now withdrawn this proposal. Canada eliminated joint audits for banks in The regulators felt there could be less accountability, less auditor oversight, and diminished quality of the financial statements with joint auditors. There could be a lack of coordination between the auditors resulting in potential for key issues to be overlooked. The cost of the audit would increase due to duplication of effort and increased coordination costs. There would be increased cost and time for management and the audit committee to work with two firms instead of one. Demographics 16. I work in (choose one): - public practice/professional services firm (a sole practitioner, small, mid-sized, national/regional) - Corporate Director or Governance role (including audit committee members) - Industry management - Financial or audit regulator - Investor - Other (please specify) Page 7

8 17. If in public practice firm only, my firm audits (choose all that apply): - Listed companies - Private enterprises - Not for profit organizations - Other entities (please specify) 18. If in public practice firm only, my firm provides (choose all that apply): - Personal tax services for individuals in financial reporting oversight role. - Non-audit services on a contingency fee basis. - Other non-audit advisory services (please specify). 19. I have been a CA for: - Up to 10 years - Up to 20 years - Over 20 years. Page 8